– The Life & Legacy Planning Group
Asset protection planning is a powerful way to provide additional value to your clients.
This article will explore seven trust-based asset protection strategies and how they can:
Protect your client’s assets from creditors, lawsuits, and divorcing spouses.
Protect your client’s assets gifted to, or inherited by, a spouse, child, or other beneficiary.
If you have questions about any of these strategies or would like help with an analysis of which clients would benefit, please feel free to call our office.
Lifetime Asset Protection Trusts – Having Your Cake and Eating It Too
A Lifetime Asset Protection Trust is an Irrevocable Trust created during the client’s lifetime that can be used to:
Qualify the client for Medicaid, while preserving an income stream for the well spouse and protecting the trust assets from estate recovery after the client dies – Asset Preservation Trust.
Create a lifetime trust for the benefit of the client’s spouse, using the gift tax marital deduction – Lifetime QTIP Trusts
Create a lifetime trust for the benefit of the client’s spouse, using annual exclusion gifts and the lifetime gift tax exemption – Family Bank Trust, also known as Spousal Lifetime Access Trust (“SLAT”)
Create a lifetime, trust for the benefit of the client – Domestic Asset Protection Trust (“DAPT”)
Asset Preservation Trust
An Asset Preservation Trust may help your clients:
Qualify a disabled or incapacitated spouse for Medicaid (while protecting an income stream for the benefit of the well spouse).
Avoid estate recovery (assets held in the trust will pass to the heirs protected from government estate recovery to pay back Medicaid benefits that were received during the client’s lifetime).
Planning Tip: Although the federal and state governments jointly fund Medicaid, each state sets its own rules and guidelines for Medicaid eligibility and estate recovery. Therefore, an Asset Preservation Trust must be tailored to the laws of the state where the married client lives. The rules in Illinois have changed several times in recent years, and are a trap for the uninformed. Trusts are also subject to a look-back period (NOT “disqualification period”) of 60 months.
Lifetime QTIP Trust
In marriages where one spouse is significantly wealthier than the other, a Lifetime QTIP Trust can be used to provide the following benefits:
Make use of the less wealthy spouse’s federal and/or state estate tax exemption
Provide a lifetime, asset-protected trust for the benefit of the wealthier spouse if the less wealthy spouse dies first (subject to state law).
Insure that assets left in the trust (after both spouses die) get distributed to the wealthier spouse’s chosen heirs.
Planning Tip: Lifetime QTIP Trusts offer a great deal of flexibility when planning for married couples with lopsided estates. During the less wealthy spouse’s lifetime, that spouse will receive all of the trust income and may be entitled to receive principal. If the less wealthy spouse dies first, then the assets remaining in the trust will be included in his or her estate, thereby making use of the less wealthy spouse’s estate tax exemption.
In addition, the remaining trust funds may continue in an asset-protected, lifetime trust for the surviving spouse’s benefit (subject to applicable state law), will be excluded from the surviving spouse’s estate when he or she later dies, and will ultimately be distributed to the wealthier spouse’s chosen heirs.
Spousal Lifetime Access Trust (SLAT)
SLATs became popular in 2012 when it was anticipated that we would go over the proverbial “fiscal cliff.” They still remain popular today as “estate freeze” and asset protection strategies. These trusts are also referred to as “Lifetime Bypass Trusts,” since they are funded with lifetime gifts that are held for the benefit of the client or the client’s spouse. As with a Bypass Trust created after the first spouse dies, distributions from a SLAT can be as broad or as limited as clients choose.
Planning Tip: SLATs are useful in states, such as Illinois, that do not collect a state gift tax but collect a state estate tax and the state exemption is expected to remain lower than the federal exemption.
Domestic Asset Protection Trust (DAPT)
The goal of a DAPT is to allow the client to fund the trust with his or her own property and maintain some degree of beneficial interest in the trust, yet have trust assets protected from the client’s future creditors. Currently, 16 U.S. states permit the creation of DAPTs and the number will likely continue to grow, although laws vary widely from state to state. Though Illinois is not one of those states, your clients may be able to use one of the DAPT jurisdictions to set up such a trust.
Planning Tip: The laws governing DAPTs are relatively new and still evolving. In addition, there is limited case law interpreting them. And, under bankruptcy law, assets remain exposed to creditors’ claims for ten years. Nonetheless, a DAPT can be a powerful asset protection strategy for the right client.
Testamentary Asset Protection Trusts – Ruling From the Grave
A Testamentary Asset Protection Trust is an Irrevocable Trust, created after the client’s death and used for a variety of reasons, including:
Protecting life insurance proceeds for the benefit of the client’s heirs – Irrevocable Life Insurance Trust (“ILIT”).
Protecting retirement accounts for the benefit of the client’s heirs – Standalone Retirement Trust (“SRT”).
Protecting other assets for the benefit of the client’s heirs – Inheritance Protection Trust.
Irrevocable Life Insurance Trust (ILIT)
Aside from removing life insurance proceeds from the client’s estate for estate tax purposes, an ILIT is a powerful tool for leveraging generation-skipping planning and protecting insurance proceeds for the benefit of the client’s heirs.
Standalone Retirement Trust
Because of the recent U.S. Supreme Court decision in Clark v. Rameker (which held that an IRA inherited by a non-spouse beneficiary is not a retirement plan protected from the beneficiary’s bankruptcy creditors), the Standalone Retirement Trust has become an important vehicle for protecting retirement accounts from the beneficiaries’ creditors.
Planning Tip: Discussing the new Supreme Court ruling and retirement account vulnerability is an effective way to identify assets that are not yet under management, but need to be protected.
Inheritance Protection Trust
An Inheritance Protection Trust is an Irrevocable Trust that can be built into an ILIT, and is an integral part of a Standalone Retirement Trust. Clients can also include Inheritance Protection Trusts in their Revocable Living Trusts to protect assets in the hands of their ultimate beneficiaries.
Planning Tip: Clients who are concerned about heirs, or who are or may become spendthrifts, married to an overreaching spouse, bad at managing money, or in a high risk profession, should incorporate Inheritance Protection Trusts into all of the testamentary trusts created in their estate plan. Such trusts can also provide substantial protection against a future divorce of the beneficiary.
Trust-Based Asset Protection Planning – The Bottom Line
Even though asset protection trusts must be irrevocable to safeguard the trust property, they offer a great deal of flexibility for clients looking to protect their own property as well as property gifted to or inherited by loved ones. Since this type of planning can become complicated and should not be attempted without the assistance and counseling of an experienced attorney, we are here to answer your questions about trust-based asset protection strategies and advise your clients on options for planning. Please feel free to call our office.